What Does Brexit Mean for U.S. Credit Unions?

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The U.S. Office of Financial Research released its mid-year assessment of threats to US financial stability in late July, including some insightful analysis of the proposed withdrawal of the United Kingdom from the EU, known commonly as Brexit. Financial experts across the globe warn that the UK referendum to leave the EU could have serious and unpredictable consequences.

Some of those consequences were immediately visible on investor confidence, sending both the pound and euro tumbling. The Stoxx Europe 600 index fell 11 percent and the S&P 500 also dipped 5 percent in the days following the referendum. Reuters reported that in the three weeks since the UK voted to leave the European Union, the value of UK funds’ assets under management dipped $40 billion (8.2 percent) as a direct result of the devaluation of the pound.

What could that mean for the US?

The OFR is cautious in its assessment of the new threat.

“Overall risks to U.S. financial stability remain in the medium range,” OFR stated in its biannual report. “However, they have been pushed higher by the vote in the United Kingdom (U.K.) to exit the European Union (EU). The result surprised financial markets and was a negative shock to investor confidence. It introduces months or years of uncertainty about the rules governing the U.K.’s investment, financing, and trade relations. Larger shocks to confidence are possible as those deliberations and negotiations play out. Because the U.K. economy and especially the U.K. financial system are highly connected with the rest of Europe and the United States, severe adverse outcomes in the U.K. could pose a risk to U.S. financial stability.”

How the US Could be Affected

• Confidence: The result of the Brexit vote has lowered confidence in the financial stability of the UK and EU, leading to uncertainty in global investor confidence. If the situation worsens and investor confidence falls further, the US could see a larger depreciation of equities.
• Trade: Any possible recessions in the UK or EU could result in lower demand for US exports. US exports to the EU account for 3 percent of GDP, while exports to the UK account for ¼ of that. According to the NCUA, this translates to 18 percent of all US export goods going to Europe, and 4 percent to the UK. Trade is not likely to have a widespread impact on US financial stability, although it is not insignificant by any means.
• Financial exposure: US companies with direct exposure to their UK and EU counterparts could face volatility, which can result in falling corporate profits and slow down investment or expansion. Commodity prices are also likely to fall with the pound.

Overall Trends

• Credit risks in US nonfinancial businesses remain elevated
• Long-term US interest rates are at ultra-low levels, may encourage risk-taking and borrowing
• Many key foreign interest rates are negative, with an uncertain future
• An uneven resilience continues in the US financial system

Key Takeaways

• Brexit could have a noticeable effect on the US economy
• Increased financial uncertainty means that short-term interest rates are less likely to rise
• Brexit has dimmed growth outlook only slightly
• Brexit is not expected to have a large impact on credit unions

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